Stock picking

ESG Incidents and Shareholder Value

14.May 2021

ESG scores are the modern trend in the financial markets, and while this sustainable investing has its critics, it seems to become a regular part of the markets. Frequently, and probably rightfully, ESG is criticized for the lack of commonality across various “scorers”, and as a result, there might be a large dispersion among the score of one firm. The reason is that the score usually consists of different metrics and aggregation methodology. Apart from this “long-term” score, investors can easily recognize the “short-term” score, which can be proxied by negative incidents such as pollution, poor social aspects, social or governance scandals and so on. Moreover, these incidents could be more informative about (un)sustainable practice compared to ESG scores. These ESG incidents are studied by the novel research of Simon Glossner (2021). Using incidents news, the author provides interesting results that mainly support proponents of sustainable investing. Poor ESG performance proxied by incidents predicts more incidents in the future, lower profitability which should subsequently spill to negative performance in future. For example, portfolios consisting of negative incidents stocks significantly underperform the market for both US and European stocks. Therefore, this research paper is a compelling addition to the literature that, apart from social aspects, connects ESG also with performance.

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An Investigation of R&D Risk Premium Strategies

19.March 2021

The R&D investments represent a company’s unique expenditure, which is responsible for creating an information asymmetry about the firm’s growth potential and future prospects. In a case when market value reflects only the firm’s financial statements without taking the long-term benefits of R&D investments into consideration, the company’s stocks may be underpriced. On the other hand, the firm’s stock prices may also face overpricing. This might happen in a case when the investors judge the possible future outcomes of current R&D investment based on the past firm’s R&D success, which is not a guarantee by any means.

So, is there a premium among firms with intensive expenditures on R&D or not? If so, does R&D expenditures represent a robust risk factor, or are there any other hidden economic forces that could explain the R&D premium? This article has tried to answer these questions by revisiting and expanding the three previously conducted research papers on R&D premium.

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Senators vs Santa’s Reindeer

29.December 2020

During the festive season, everything is more relaxed, and this week´s blog is no exception. The stock-picking abilities of animals are not the main research topic for most academics, yet the stock-picking skills, for example, of monkeys, were previously documented. To our best knowledge, the paper of Belmont et al. (2020) is the first that examines the stock-picking abilities of reindeer. Moreover, the performance of reindeer is compared to the US senators during 2020. Trading of US senators or congresspeople is particularly interesting since there are concerns about informed stock trading. Especially during the COVID pandemic, where the governments have a significant influence on the economies. The finding of the paper is that the performance of the senate is behind reindeer. However, the reindeer exhibit herding behavior and momentum preferences. Perhaps, their abilities should be examined more deeply during a more extended period.

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Large Cap Analysis

23.December 2020

Every week, through these posts, we point to interesting academic research papers. This week´s blog is slightly different, yet no less engaging. This blog includes numerous interesting charts from more than hundred charts in the CUSTOM REPORT: U.S. LARGE INDEX by the PHILOSOPHICAL ECONOMICS using OSAM Research Database. The report consists of the visually presented analysis of the U.S. Large index. The analysis includes the composition, returns, individual stocks, sector and factor allocations, and six fundamentals. The report contains comprehensive information about the large caps in the U.S. market from 1963 to 2020 and is worthy of a look.

We wish you all Merry Christmas …

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The Active vs Passive: Smart Factors, Market Portfolio or Both?

11.December 2020

While there may be debates about passive and active investing, and even blogs about the numbers of active funds that were outperformed by the market, the history taught us that the outperformance of active or passive investing is cyclical. As a proxy for the active investing, the new Quantpedia’s research paper examines factor strategies and their smart allocation using fast or slow time-series momentum signals, the relative weights based on the strength of the signals and even blending the signals. While the performance can be significantly improved, using those smart approaches, the factors still got beaten by the market in both US and EAFE sample. However, the passive approach did not show to be superior. The factor strategies and market are significantly negatively correlated and impressively complement each other. The combined Smart Factors and market portfolio vastly outperforms both factors and market throughout the sample in both markets. With the combined approach, the ever-present market falls can be at least mitigated or profitable thanks to the factors.

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Stock Price Overreaction to ESG Controversies

23.November 2020

Nobody can doubt that in the recent period, ESG investing has significantly grown and is a staple part of the financial markets. The academic literature has also grown with the popularity of ESG investing. The negative, mixed and positive results for ESG scores in portfolios have evolved, and generally, there is a consent that ESG scoring can be a vital part of the portfolio management process. It can be observed that in the past, the ESG scores were not priced in the equity market and still, the ESG is not priced in the corporate bond market (apart from Europe). Nowadays, the investors react to the ESG scores, but the research paper of Cui and Docherty (2020) has novel insights that investors may react too much to the ESG. Their research shows that investors overreact to the negative ESG events and stocks connected with negative ESG events sharply fall, but the prices have mean-reverting properties. As a result, there is a reversal after bad ESG events. Stocks firstly sharply fall, but then their prices are reverted to the previous values. Therefore, this paper is interesting from the market pricing or efficiency point, but it also can be utilized by a reversal investor.

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